Within the framework of the Stability and Growth Pact, EU Member States have been required for more than 20 years to return to the former average public debt ratio of 60 percent of gross domestic product (GDP) and not to let their deficits rise above 3 percent of GDP. However, the predominantly rule-based fiscal policy is less and less able to stand up to reality, on the one hand because the public debt ratio inevitably rises with every serious crisis, and on the other hand because the answers to the climate crisis require much more public investment. Adhering to these rules, especially in economic bad times, means that they will soon turn out to be at the expense of other social, economic or environmental policy goals.
 

By activating the general escape clause after the outbreak of the Covid 19 crisis, the strict adherence to the budget rules was abandoned and the states were finally given the necessary freedom to counteract an economic slump. To date, however, much-needed investments have fallen far short of what would be required to manage the green transition. Moreover, it is planned that the fiscal rules will apply again from the beginning of 2024. To prevent the old rules from being applied again, it is high time to modernise them.

Overdue revision of EU budget policy
After the planned review of economic governance - and thus above all of budgetary policy - was postponed from early 2020 to 2022 due to the Corona crisis, the EU commission proposal for new economic governance rules fit for the future was finally presented at the end of April. Initially, the well-known deficit and debt limits will remain in place, but in the event of deviations - depending on the sustainability of the public debt - there will be more leeway for correction. It is rightly assumed that a one-size-fits-all approach does not make sense due to the different starting positions of the Member States. In this sense, in-depth country-specific analyses are foreseen in the Commission's assessment in order to counteract an economic slump.

At the core of the proposal are national plans based on EU rules in which Member States present their fiscal adjustment paths, usually formulated as four-year spending targets. This is intended to increase “national autonomy”. The plans are assessed by the Commission and must be approved by the Council. Annual progress reports by the states have to be provided for monitoring and enforcement purposes. In addition to budgetary targets, national plans are to include reform and investment targets. If states commit to a “series of reforms and investments” along certain criteria, they will benefit from “a more graduated fiscal adjustment path”. In addition, the Commission wants to provide for "stricter rules on enforcement" of the national plans to ensure that Member States deliver on their commitments.

The crucial point are the concrete minimum requirements that these plans must fulfil. Here, the Commission is adhering to the already valid consolidation obligation of at least 0.5% of GDP, but only for countries with a deficit above 3% of GDP. With regard to debt reduction, the much-criticised “new” reduction obligation of at least 1/20 per year of the part exceeding 60% of GDP is replaced by the simpler and more realistic requirement that the public debt ratio must be below its original level at the end of the plan. These relaxations are to be welcomed in principle, but they run the risk of falling short and, especially in the short term, of becoming a “brake” on social and environmental goals in all those countries that are still far away from the fiscal targets - such as France, Italy or Belgium. At the same time, they are under fire from the hardliners in the Council of Finance Ministers, who want to sacrifice the achievement of social and ecological goals in case of doubt in order to quickly meet the fiscal policy goals.

What happens next
The proposal is now with the European Parliament and the Council for further processing. The Commission calls on them to reach an agreement “as soon as possible”. Commissioner Gentiloni is confident that a conclusion of the legislative work is possible by the end of the year.

For a prosperity-oriented budget policy
From the workers' perspective, there is a clear need for improvement in the present proposal, as it is unclear how there will be enough room for the necessary investments in the future in a corset of fiscal rules that is only somewhat less tight. In particular, an additional common EU investment fund or a golden rule for investment is missing. The European Trade Union Confederation even sees the risk of a relapse into austerity policy. From the point of view of the Chamber of Labour, this should be prevented at all costs. Cuts in the social, health or education sectors are a dangerous social step backwards and hinder economic development. It would also be highly problematic to link reform measures that are detrimental to workers with fiscal policy relief. Finally, the democratic embedding of economic policy must be respected.

Further information
EU Commission: Commission proposes new economic governance rules fit for the future
EU Commission: Factsheet - Commission proposes new economic governance rules fit for the future 
AK EUROPA: Proposal to reform the European fiscal rules: better, but still not good
AK EUROPA: EU Economic Governance Review
ETUC: New EU economic rules bring back risk of austerity